CREDIT ABUSE EDUCATION PROGRAM prepared and presented by Karen Grant and Joel Ohlgren Santa Barbara Federal Bar Association Bankruptcy Committee

1.Credit means: A.You have a good reputation. B.You might graduate. C.You can borrow to buy things. D.You can get things at the store for free.

What is Credit?  Credit is the ability to borrow money.  Borrowing is the creation of debt.  Debt is what you owe. Always remember that there is no such thing as a “free lunch”.

2.Debt means: A.You are in a deep hole. B.You have to pay money to someone. C.You owe someone a favor. D.You are entitled to free stuff.

3.Interest means: A.Money you pay to rent money. B.Someone else likes you. C.You like someone else. D.You qualify for a scholarship.

PEANUTS: © United Feature Syndicate, Inc.

4.Compound interest means: A.Liking more than one girlfriend or boyfriend. B.Interest charged on interest that is added on to the credit card bill. C.Something you learn in chemistry class because it interests you. D.A grinding powder.

The Trick about Interest  Interest is the price you are charged to borrow money. The higher the interest rate, the more you will pay.  Simple Interest: (Principal) x (Interest) = Amount Due  Compound Interest: (Principal + Accrued Interest) x (Interest Rate) = Amount Due

5.APR or Annual Percentage Rate on a credit card: A.Can be changed at any time by the credit card issuer. B.Can never be changed. C.Is the minimum you have to pay on a credit card bill. D.Must be discussed with the credit card holder.

6.The interest rate you pay on your credit card will be: A.30%. B.21%. C.18%. D.12%. E.Any of the above.

7.The interest rate the bank will pay for the money it borrows to loan to you will be: A.18%. B.15%. C.10%. D.5%. E.Less than 5%.

8.Credit availability means the maximum amount you can borrow on the credit card. True False

9.Credit availability can be changed by the credit card company. True False

10.Grace Period means: A.You don’t have to go to class during this period. B.It’s your lucky month in the horoscope. C.You don’t have to pay the bill or interest on the bill for a short time. D.If you owe only 50¢ on your credit card, you don’t get a “grace period”. E.A short version of the song “Amazing Grace”

11.Billing Cycle means: A.The cost of a new bike. B.How often the credit card company sends you a bill. C.Weekly. D.Daily.

12.Late payment penalty is a fee charged by the credit card company when it receives a payment after the required payment date. True False

13.Late payment penalty is a fee charged if you don’t mail the payment by the required payment date. True False

14.Assume you have a credit card bill on which you always make payments on time. You miss your apartment rent payment. The credit card company can raise your APR interest rate. True False

15.Assume you have a credit card bill on which you always make payments on time. You miss your apartment rent payment. The credit card company can reduce your credit availability. True False

16.Late Payment Penalty: A.Cannot be more than $5. B.Cannot be more than 5% of the credit card bill. C.Can be changed at any time by giving you notice. D.Has to be paid in full and can’t be added to the debt. E.Is a fair estimate of the credit card company’s cost related to the late payment.

17. Minimum Payment is: A.All the interest charged to the bill. B.A percentage of the total bill, for example 5%. C.Designed to pay off the debt quickly. D.A good way to manage your obligations.

18.Assume your credit card bill is $7,000, you don’t charge any more on the credit card, your APR is 18.9% and you timely make minimum payments of 3%. How long will it take to pay off the bill? A.3 years. B.6 years. C.10 years. D.16 years. E.More than 16 years.

19.Assume the facts in question 18. How much more $$ will you actually pay for the bill in addition to the $7,000 bill? A.$3,000. B.$5,000. C.$6,000. D.$7,000. E.More than $7,000.

The True Cost of Credit A $7,000 Balance (at 20% interest) = $1,400/year = $ 116/month (…and you haven’t paid any of the $7,000 back yet.) Your credit card disclosure statement will state something like “your minimum payment will be 2% of the balance or $10, whichever is higher”. If you make the minimum payment of 2%: Your interest charges will total:$30, Number of payments you make:601 Total number of years to payment:50.08

If You Save That Money If you save or invest $20 per month for years: 5% = $ 54, % = $ 76, % = $161,861.61

20.Which person does a credit card company like most? A.Person who pays the total bill before the due date every month. B.Person who charges a lot on the credit card and pays it off every month. C.Person who charges a lot on the credit card and pays the minimum payment every month. D.Person who misses payments but always catches up within a month or two.

What is a Budget? INCOME Gross wages$2,000 Less payroll deductions 400 Net monthly pay$1,600 EXPENSES Rent$ 500 Utilities 40 Food 300 Clothing 20 Laundry 20 Medical/Dental Transportation 200 Recreation 30 Insurance 90 Taxes Installment Payments 350 Misc. Expenses 50 Total Expenses$1,600

10 Simple Rules to Remember 1.Have a budget and live within it. 2.Don’t have more than one credit card. 3.Shop around and get the best deal. 4.If you can eat it, drink it, or it costs less than $10, don’t charge it. 5.Use a debit card, check or cash whenever possible. 6.Pay off the balance every month. 7.Always have a plan – never make just a minimum payment. 8.On the 15 th of the month, call the 800 number on your credit card and check the balance. 9.Understand the difference between needs and wants. 10.If you are borrowing to pay a credit card debt – STOP – you are in trouble.

What is so important about Good Credit?  Your history of payments, employment, and salary makes you a good candidate for a loan.  You can get a better interest rate – lower payments.  You will be viewed as financially trustworthy – better loan terms.  May help you rent and obtain employment – most landlords and prospective employers will look at your credit report.

What is so important about Bad Credit?  Your history of making payments late, not paying your debts, or borrowing too much money makes you a poor candidate for a loan.  You will pay higher interest rates – higher payments.  You may have trouble getting a loan, a credit card, a place to live, a student loan, and employment.

Consequences of Credit Abuse  Divorce or relationship problems.  Depression or suicide.  Bad credit rating.  Being turned down for a job.  Being unable to rent or buy a car.  Reduced performance at school or work.  Being turned down for a loan.  Having to drop out of school.  Having a reputation that you have bad judgment or lost control over your life.  Not having money to retire or help your children.  Creditors calling your home or work.  Being sued and having judgments against you – wages garnished.  Bankruptcy.

21.Indentured servitude: A.Was a Colonial period practice where a person would agree to work for a term of years to pay back a debt. B.Is a rock group. C.Means you are in jail. D.Only happens in third world countries. E.Can never occur again.

22.Bankruptcy means: A.You are broke. B.All you have gets sold to pay off your debts. C.All the income you make in the future will be used to pay your living expenses and your old debt. D.A court requires you to pay back some or all of your debt. E.All of the above.

Copyright, 2004, Tribune Media Services. Reprinted with permission.